Bid, Ask, and Spread

If you have navigated a trading platform for any length of time and asked yourself why there are two prices for each currency pair, you have encountered the concepts of bid & ask, as well as the slight difference between the two, known as the spread. The prices provided on a trading platform are not magic - they pass through all the functionality that goes into every transaction in Forex, stocks, or commodities. Understanding bid & ask is like learning the Market's "price language."

Please don't be mistaken, learning how to read the Market's price language provides the means to identify exactly where it comes from, how brokers are profiting on every transaction, and where to most effectively identify the entry and exit point in a specific trade. In this article, we will unpack bid, ask, and spread into simple language that will enable confident trading without costly surprises.

What Is The Bid Price?

The bid price is the highest price that a buyer is willing to pay for a specific currency, stock, or other asset at any time. In Forex, when you are selling a currency pair, you are selling at the bid price.

For instance, if EUR/USD is marked 1.1050 / 1.1052, the bid price would be 1.1050. The bid price, or the rate at which you would sell euros in the currency pair, is 1.1050.

You may think of the bid price as "the market's buying price." The bid price indicates what other market participants - Banks, brokers, and traders - are currently willing to pay.

What is the Ask Price?

The ask price (sometimes referred to as the "offer" price) is the lowest price a seller will accept for the asset. With Forex, when you buy a currency pair, you are buying at the ask price.

For example (of EUR/USD 1.1050 / 1.1052), the ask price is 1.1052. This is what you will pay (per unit of the base currency) to buy euros in this pair.

Think of the ask price as being "the selling price of the market." It reflects the value sellers - i.e., liquidity providers - are asking in return for assets.

What is the Spread?

The spread represents the difference between the ask price and the bid price. The example we used earlier, 1.1052 (ask) - 1.1050 (bid) = spread of 0.0002, or 2 pips.

The spread is relevant because:

• It is a built-in transaction cost. Because a trade always starts slightly negative, as you buy at the higher ask price and sell at the lower bid price.

• It is one of the primary ways brokers and market makers make money.

• It is variable based on market conditions, liquidity, and currency pair being traded.

Why Spreads Matter to Traders

The spread is also essential to traders directly because of its impact on profitability. This is especially relevant for shorter-term traders who conduct multiple trades per day. A small spread can accumulate significantly if you enter and exit positions often. For example, as a scalper targeting a 5-pip profit, they must overcome a two-pip2-pip spread. Therefore, they need a 7-pippips of price movement to recover their costs and achieve a profit.

Things that affect the spread

1. Market Liquidity

Major currency pairs, such as EUR/USD and USD/JPY, have substantial volumes and often have the narrowest spreads, typically under one pip during active hours. Exotic pairs have weaker liquidity, such as USD/TRY or EUR/ZAR, and usually will have wider spreads.

2. Market Volatility

During essential news events or when the Market makes an unexpected move, spreads can widen as brokers attempt to manage their risks.

3. Time of Day

You will see the tightest spreads within the overlap of the two sessions of the Market (ie, London/NY) and the widest when there is little going on in the markets (ie, later US session before Asian session starting).

4. Broker Type

• ECN brokers usually provide you raw spreads (ie, what they pay, almost zero pips), and charge you commission every time you enter a trade.

• Market makers typically will show a slight premium on the spread and, in return, will not show a commission on your trades.

Bid, Ask, and Spread in Action

Let's say you open your trading platform and you see the following quote for GBP/USD:

1.2500 / 1.2503

• Bid = 1.2500 (sell pounds and buy US dollars at this price)

• Ask = 1.2503 (buy pounds and sell US dollars at this price)

• Spread = 0.0003 or 3 pips

If you buy GBP/USD at the ask (1.2503) and then immediately sell at the bid (1.2500), you have a three pip loss - and that is the cost of the spread.

How to Reduce the Impact of Spreads

• Trade Major Pairs: The spreads on major pairs tend to be the tightest because of the liquidity in these markets.

• Trade During Peak Hours: The overlap of trading sessions often provides the best spreads.

• Choose Your Broker Wisely: Make sure to compare the spreads and fee structure.

• Avoid High Volatility Times (unless that is your trading strategy): Spreads can jump during major news releases.

Fixed vs. Variable Spreads

• Fixed spreads do not change regardless of whether the Market is moving with a lot of volatility, meaning they have some disadvantages but offer transparency and certainty regarding how much will be retained from your trading account to pay transaction costs, which in turn influence the costs in implementing your strategies. Fixed spreads are typically even, though they may be slightly wider than other spreads on average.

• Variable spreads change based on liquidity, volatility, and time of day. Variable spreads can be extremely tight during normal market conditions but can become extremely wide at specific points in high volatility, unless they are fixed.

Ultimately, both have advantages and disadvantages;s betteone r is dependepends trading style and willingnyour ess to have a madjust your costs as needed.

The Psychology of Bid and Ask

Understanding bid and ask prices also helps you understand the psychology of the Market. If the bid price begins to move steadily higher (and quickly), it is often an indication that there is a lot of buying pressure stepping in.` "If the ask price drops, it may suggest that sellers are trying to exit their position at a lower price.

Evaluating the movement of the bid and ask relative to each other can provide some insight into the short-term supply-demand characteristics that intraday traders will find helpful to trade on these profile movements.

Common Mistakes Traders Make Regarding Spreads

1. Disregarding the impact of the spread on their trading strategy.

New traders often assume they are using the average trade size in commissions, only to discover that the commissions and spread costs (which come out of their account) don't leave them with the profit they expect their position to be worth.

2. Trading low liquidity pairs without research.

The higher spreads on exotic pairs will eat into your profits faster than you realize.

3.  Entering into trade positions at the wrong time.

Opening a loss with the cost of the spread, when oh can be x pounds greater right before the news release, there is an immediate disadvantage to entering at that time.

Conclusion

Bid, ask, and spread may seem like small technical details, but they are part of the foundation of every trade you undertake. Whether you enter a trade at a bid price and exit it at the ask price, your transaction costs ultimately determine your profit or loss.

Once you've come to understand these critical concepts and become cognizant of how they are changing with market conditions, you should be able to order your trading decisions with more precision, minimize costs, and understand one of the underlying components to trading with confidence. Whatever the Market you are intending to trade, Forex, Stocks, or Commodities, establishing your grasp of the essence of bid, ask, and spread is a small first step with the potential for considerable differences in your results.